Good day and welcome to the Five Star Quality Care first quarter 2011 financial results conference call. This call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to Five Star’s Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you and good morning, everyone. Joining us on today's call are Bruce Mackey, Five Star's President and CEO and Paul Hoagland, Five Star's CFO. The agenda for today's conference, a presentation by management followed by a question-and-answer session. I would note that the recording and retransmission of today's conference call is strictly prohibited without prior written consent of Five Star.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities Laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, April 28, 2011.

The company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding the supporting period.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements.

And now, I would like to turn the call over to Bruce Mackey.

Bruce Mackey

Thanks, Tim, and thanks to everyone for joining us today. Early this morning we reported net income from continuing operations of $0.16 per basic share and $0.15 diluted share for the three months ended March 31, 2011. This compares with $0.13 per basic and diluted share that we reported for the same period a year ago.

During the trailing four quarters, our diluted net income from continuing operations is $0.71, strengthening our consistent profitability trends over the past two plus years. We recognize the important of delivering consistent financial results to our shareholders and we will continue to do so.

Before we get into the financial highlights on the quarter, I would like to review some acquisitions and disposition activity that we expect to close during the second and third quarters of this year.

First, in early March, Senior Housing Properties Trust announced that they are acquiring a 20 community portfolio from Senior Living for $304 million. We’ll be entering into traditional net lease for five of these communities and will be entering into a management agreement for the other 15 communities. In total, the 20 communities have 2,111 living units and the breakdown is as follows; 814 independent living apartments, 939 living suites, 311 suites which offer specialized Alzheimer's care and 47 skilled nursing beds. These communities fall nicely Five Star’s existing footprint in the Southeast. Seven communities are in North Carolina, five communities are in South Carolina, four communities are in Florida, two are in Virginia and two are in Georgia.

We are currently negotiating the terms of the lease and management agreements with Senior Housing and will report on those terms after their conclusion. This portfolio is significant to Five Star for a number of reasons. First, as I just mentioned, the communities fit into our existing footprint. We can operate these communities without significantly increasing our regional headcounts.

Second, there is the potential upside for us by increasing occupancy and discovering cost efficiencies. As of March 31, 2011, the portfolio was 88% occupied. And lastly, we may be able to add Five Star’s pharmacy services to a number of the communities, as well as add our outpatient rehabilitation business and all that ancillary income will drop to our bottom line.

We expect closing this transaction during the second and third quarters. Next on the acquisition front, we are acquiring a 73 unit community in Watford, Illinois. This community is 86% occupied and was built in 1999. We will be leasing from Senior Housing through a traditional net lease. We expect to close on this transaction next week.

Lastly, Five Star has agreed purchase several properties using our own balance sheet. As we discuss our growth strategy, along with traditional sale lease tax, we would like to grow our own portfolio when the opportunity arises and the acquisition makes sense for Five Star.

The first acquisition is a property in Arizona we have agreed to purchase for $25.6 million. It’s a 116 unique community that is 97% occupied. The property was built in 1996 and remodeled in 2006. It has (inaudible) popular expansion. We are assuming $18.7 million of Fannie Mae debt, which is due in 2023 at the rate of 6.6%. The balance is to be paid in cash.

We expect to closing this transaction next week. The second acquisition is a group of communities that we’ve agreed to purchase in excess of $100 million, with about 750 units located in the Midwest states. We expect to closing this transaction in either the second or the third quarter and will update on the details shortly. We are currently in diligence with these properties. I would like to remind you that this transaction is subject to customary closing contingencies and it may not close.

On the disposition side, we have hit the closing the sale of three skilled nursing facilities located in Georgia that we leased from Senior Housing. This deal was announced on our last quarter’s call.

During the first quarter, we also agreed to sell two skilled nursing facilities located in Michigan. The buyer is conducting diligence now and we expect this deal to close in either the third or fourth quarter. We see this pick-up in transaction activity a reflection of the gradual rebound in the community markets and a reflection of Five Star’s strength as an operator. 2011 is shaping out to be a very exciting year for Five Star. I would now like to review some highlights from the first quarter.

Senior living occupancy for the first quarter of 2011 was 85.5% compared to 85.9% the quarter ago and 86.2% a year ago. Same store occupancy for the first quarter of 2011 was 85.4% compared with 86.2% a year ago. Occupancy as of yesterday was 86.2%. Historically, Q1 is the weakest quarter for us in terms of occupancy. So, while we are concerned with it slipping a bit in Q4, without question, increasing census IS Five Star’s number one priority.

As I told you on our fourth quarter call, in April, we added a Vice President of Sales and Marketing to our team, a new position to our company and we are in the process of expanding our regional sales teams. The senior management team is working closely with our new sales and marketing leadership to increase the efficiency, accountability and ultimately, the success of our sales programs. We will be thorough in our review.

For example, we have hit the more heavily the occupancy components that determine the executive directors’ and marketing staffs’ compensation and measure and reward cross-community cooperation in generating leads. Same-store increase were up 9% in the first quarter of 2011 compared to last year and loss were up 6% from last quarter. Same store deposit in the first quarter of 2011 declined 17% from last year, but were up 10% from last quarter.

While I am pleased (inaudible) in the right direction, there are opportunities for us to do a better job by converting increase deposits. This is a main focus for our new Vice president of Sales and Marketing. We did, however, take on the highest amount of deposits since last August during March 2011.

Deposits in March were also their second highest level over the last twelve months. We continue to push our private pay rates when possible. Our Senior Living average daily rate increased 3.5% during the quarter, more importantly 3.7% on a same-store basis. Looking forward, we still expect our private pay rate to increase 3% to 4% in 2011.

Moving on to other metrics, wages and benefits as a percent of senior living revenues were 49.5% during the quarter, virtually unchanged from last year which was 49.4%. G&A as a percent of revenues was consistent with last year at 4.4%. We still maintain the leanest operations in the industry. Our stated goals hit us the year around 4.5% of revenues.

Our core senior living business continues to be profitable. Just over 85% of our total company revenues come from this business. 71% of our senior living revenues are derived from residents’ private pay sources.

In the first quarter of 2011, Five Star Senior Living produced $24.6 million of EBITDAM, up 9% from $22.6 million last year. The rehabilitation hospitals which account for 8% of our total revenues, lost about a $1 million of EBITDAM during the first quarter which is consistent with last quarter. On a more positive note the Center for Medicare Services recently issued a proposal for 2012 to increase their urb rates by 1.5%. In fact, this proposal will positively our rehab business.

We now have approval from the states to relocate one of our 20 unit poor performing in-patient satellites, which we expect to move to a brand new facility by the end of 2011. The traumatic brain injury unit at our Woburn hospital opened for patients during January and we have seen positive results so far.

Even though we are still developing our program and are in the credentialing process, we have taken on just over 10 patients that we wouldn’t have gotten without the new unit. The pharmacy operations which make up 6% of our total revenues made $448,000 on EBITDAM basis during the first quarter. That is about $100,000 decline from the first quarter of 2010, but an improvement of $252,000 from last quarter. Currently, we have approximately 12,400 customers and expect to add over 1000 additional customers during the next several quarters.

Our balance sheet remains strong. We ended the quarter with approximately $26 million in cash, have in excess of $200 million of book value, not fair market value in net property and equipment. This includes 24 of the properties we own which are unencumbered with debt. Although at quarter end, $5 million of our $35 million revolving credit facility was engaged in outstanding that has been repaid and nothing is outstanding today.

During the first quarter, we purchased $623,000 of our convertible senior notes at a 3% discount to par. We have $37.3 million of convertible senior notes currently left that can be put to us in October 2013. The first quarter was another excellent operating quarter for Five Star. We remain well positioned to take advantage of the gradual rise in occupancy that is anticipated for our industry. Our key to success remain the same. Increased occupancy and average daily rate, while holding labor, operating expenses and G&A cost in check.

Throughout the past year, we have performed consistently on the last four and we are stronger to date than perhaps at any point in company’s history. Our stock results have tested the strength of Five Star and the opportunistic position we are in as we are for the overall industry to improve.

As I said last quarter, we realized Five Star’s largest opportunity to significantly enhance shareholder value with the increased occupancy. Every percentage point increase on occupancy increases our revenues by an additional $10 million. The majority of these additional revenues will flow to our bottom line. As the economy continues to improve, so will our occupancy. But some year prior to recession, our occupancy was above 90% and expect us to get back to those levels once again.

At this point, I would like to turn the call over to Paul Hoagland, our Chief Financial Officer.

Paul Hoagland

Thank you, Bruce, and good morning, everyone. For the first quarter, senior living revenues increased $8.2 million or 3.2% to $263 million as compared with the first quarter of 2010. This increase was due primarily to revenues from the one community we acquired during the third quarter of 2010, plus increase per diem charges to revenues on 3.5%, offset by a decrease in occupancy which decreased from 86.2% to 85.5%. The 3.7% increase in per diem charges to residents, that’s the communities we have operated continuously since January 1st, 2010, generated approximately $9.4 million of revenues.

Senior living wages and benefits expense increased $4.3 million or 3.4% to $130.3 million compared with last year. $416,000 of this increase was due to our new community and $1.8 million was from health insurance and workers’ compensation. As a percentage of revenues, senior living wages and benefits were 49.5% or 10 basis points higher than the first quarter of 2010 which was 49.4%.

Other senior living operating expenses increased $1.1 million or 1.8% compared to last year. This was due to a $223,000 increase from our new community and an $892,000 increase on our comparable communities. As a percentage of revenues, senior living operating expenses decreased 30 basis points from 24.4% to 24.1%. We have less relative expense in our operating supplies, services and food as we are increasing our focus in these areas.

We continue to fix this to monitor and reduce our utility expense. The seasonality of our business – these utility costs at their highest levels during the first and third quarters. During the first quarter of 2011, our utility expense followed the same pattern, increasing by $1.9 million from the last quarter. So, we are going to use it. As you’ll recall in 2010, we entered into an outsourced processing arrangement with a third party that will pay in line and purchase energy for our company.

The initiative became fully operational during the first quarter. In addition, we made a capital investment of just under $3 million in our lighting retrofit program that was completed at end of 2010. And we’ve stated before we expect to see a reduction in our consumption of utilities and resulting expense in 2011 as a result of these initiatives.

Turning to our ancillary businesses, the rehabilitation hospitals generated a first quarter EBITDAM loss of $1 million. Although hospital revenues were up $1.6 million or 6.5% compared to last year primarily due to increase in third-party insurance provider rates, they were offset by a decrease in occupancy which decreased slightly from 54.7% to 54.3%.

Hospital expenses as a percentage of revenues decreased 34 basis points due to lower relative salary, benefit and operating expenses. Our pharmacy operations achieved $448,000 margin in the quarter and pharmacy revenues were down 1.2% compared to last year. However, pharmacy expenses decreased 70 basis points from the prior year.

During the quarter, general and administrative expenses increased $523,000 or 4% from last year, primarily due to wage increases. Our G&A cost as a percentage of revenues remain at 4.4% and are within our range of expectation. Rent expense increased $954,000 or 2% compared to last year when most of this increase was due to new capital purchase from senior housing of $1.1 million. Income tax expense for the quarter was $379,000.

Now let me review our liquidity, cash flows and selected balance sheet items. Cash provided by operating activities in the first quarter of 2011 was $20.4 million. During the first quarter, we invested $13 million in cash deposits for acquisitions and we repurchased a small amount of convertible debt for a total outlay of $604,000.

At March 31st,we had cash and cash equivalents of $26 million. We have drawn $5 million on our $35 million revolving line of credit and to our knowledge, we are in full compliance with all material covenants. Today, our balances remain undrawn. Consolidated EBITDA increased 17% to $10.5 million from $9 million last year. We made $15.1 million of capital investments during the quarter and sold $10.8 million of capital improvements to senior housing.

Our accounts with senior management remained strong as the number of days sales outstanding for the consolidated operations was 20.3 days at March 31st which remains very low and well controlled. At the end of the first quarter, we had $201 million of net property and equipment which includes the 24 unencumbered properties directly owned by Five Star.

We had $37.3 million of convertible senior notes and $7.7 million of long term HUD mortgages outstanding now included in discontinued operations. We believe we are in compliance with all material terms of our credit note and mortgage agreements. In closing, we remain focused on increasing our occupancy and as Bruce has noted, we are taking active steps by making investments in marketing and sales initiatives to do so.

We continue to invest significantly in the capital upkeep of our properties and have been rewarded with an average comparable community rate increase of approximately 3.2% over the last seven quarters. We are well positioned to capture strong margins in closing as we increase our occupancy and are well positioned to make profitable acquisitions.

With that, I would like to open it up for questions for Bruce and I. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from the line of Joel Ray of Davenport. Please go ahead.

Joel Ray – Davenport

Good morning, folks.

Bruce Mackey

Good morning, Joel.

Joel Ray – Davenport

I was wondering if you could quickly recap again, I apologize, you had indicated, I think you had said 750 units were potentially being acquired in the Midwest, could you repeat the specifics, details that you have available on that forming?

Paul Hoagland

We didn’t really pay much strong and we still are in diligence, and credit covenants, all the agreement, it’s a deal that we outlined in excess of $1 million about 750 units that’s located in Midwest states. In general, the properties fit with Five Star’s acquisition strategy. They are newer assets, predominant private pay, independents and celebrities. That’s about all we can really say right now.

Joel Ray – Davenport

Right, but the point is, about a $100 million transaction is what you had indicated.

Paul Hoagland

Correct. Yes.

Joel Ray – Davenport

Okay, if I had – heard, missed that. In addition, is there any other incremental information available on the Arizona property? It sounds like they – nice occupancy rates involved here and up-to-date facility.

Paul Hoagland

Correct. Beautiful properties, well run, located in, Prescott, Arizona, an area called about the property and why we are acquiring is the land for expansion, we’ve got plenty of those land for expansion and we’ll start something on that in the coming areas. So, it should be the natural term Five Star’s investors.

Joel Ray – Davenport

Well, great. In addition, as far as the Senior Housing Properties Trust timing, you didn’t hit – I think you said over the next couple of quarters, is it all coming at once vis-a-vis the 20 properties or is it just coming in parcels?

Paul Hoagland

Still being worked on right now, I mean, it’s advantageous of Five Star if we can do it all at once or do it all at once, just do the licensing and debt assumptions really on senior housing’s part. We’re not sure we could close all at once. So, it might be a second close, but again the details are still being worked on right now.

Joel Ray – Davenport

Okay. Next time, you obviously, and I would agree, are focusing on building occupancy. You said you have a new senior executive involved there. I was wondering if you could talk to us a little bit about any of the plans currently in place trying to focus on occupancy. But, it seems like it’s still deteriorating a bit, not fast, but certainly not as firm as we would like to see it, yes.

Paul Hoagland

No, no question. That’s really why we made significant investments in that area. The person we hired has considerable experience in sales and marketing. She has about 20 years. The majority of that dedicated to senior living at large companies. There’s (inaudible) advisor, she actually came from a public company. We’re expanding our regional teams as I said in the prepared remarks. We’re happy with where the increase are right now. We’re not happy with where we’re closing those deals. So I think one of the things we really need to focus on in enhancing our sales training, really creating a sales culture, a closing culture here at Five Star, how we get those increase towards and towards the deposit etcetera and get them in our communities. And that’s a really large focus. I think we did a good job, like I said, of getting – sourcing those and getting them in and how we take those next steps and close that up and that’s where we’re working. I do want to point out – I apologize, pointed out to me – I miss speak when I said 86.2. It’s actually 85.2% as of yesterday.

Joel Ray – Davenport

That’s good to note. Next, are you (inaudible).

Operator

I don’t know. It looks like his line disconnected. (Operator instructions) And our next question will come from the line of Jerry Doctrow of Stifel Nicolaus. Please go ahead.

Jerry Doctrow - Stifel, Nicolaus & Company

Good morning.

Bruce Mackey

Good morning, Jerry.

Paul Hoagland

Good morning.

Jerry Doctrow - Stifel, Nicolaus & Company

So, I wanted to step off and ask a little bit broader question if I could. Obviously, a lot of stuff going on the first right year [ph] transaction coming. You’ve committed now to buy a number of properties on your own. And you’re also sharing some assets. So, if I’m trying to just think about Five Star kind of in totality or kind of strategically what you’re trying to do, are you acquiring – I guess, I’m trying to just understand sort of, maybe, the rationale kind of behind some of this, are you acquiring in certainly concentrated geographic areas? Is it certain property types? What does the company look like or sort of trying to build?

Bruce Mackey

Sure, that’s a good question. I think over the years, we’ve said we always like to own more assets. I think when the Red [ph] transaction – when the ability to do that came along, we said we all – at that point available to us, traditional sale of these facts, potentially management contracts and owning our own assets, we’ve also owned a number of assets; we’ve increased that over the last two years. Today, we own about 10% of our assets. Looking at Five Star long-term, if we had a 35, it might take us a long time to get there. I think that would be a nice place for us to be. We’re obviously looking at assets that Five Star is buying. We can – obviously, every deal we look at is going to make sense and make my importance get-go. A lot of assets that we’re buying and we bought in the last two years, are assets that we can significantly enhance the platform out. If you look at the Arizona property, for example, again that’s a property where we get land for expansion. And we’ll be looking to add to that portfolio, we’ve done over the years to past assets that we’ve owned. So, again, looking at the long-term, the strategy is 30s, those pockets, I think would be a reasonable expectation.

Jerry Doctrow - Stifel, Nicolaus & Company

And, again, in terms of ones you own versus ones you say leased or managed are primarily where you see, whether it’s turnaround or some sort of value enhancing proposition rather than sort of a stabilized?

Paul Hoagland

Yes. It’s not only obviously or the potential of the upside in return for our shareholders, but again we do want to just take the entire portfolio and build the company, judge from a standpoint of quantity, the quality of asset and revenue. And I think the other comment on the shape of the company would be again as we announced the fourth quarter and our first quarter, we’re divesting five skilled nursing facilities. Again, we’re trying to slightly alter and moderate the reliance on third-parties and continue to focus on the core business of senior living.

Jerry Doctrow - Stifel, Nicolaus & Company

Okay. And, in terms of a preference – it’s not that, it’s more of sort of just asset quality and sort of where it’s located geographically?

Paul Hoagland

That’s right.

Jerry Doctrow - Stifel, Nicolaus & Company

Okay. And then just a couple of other things, so in terms of the satellites and I think you also mentioned this new unit you had opened. In terms of IRFs, any sense as to the impact of some of that stuff either in terms of quantity or timing of when we’d start seeing it improve some of the operating fundamentals maybe at the rehab hospitals?

Bruce Mackey

Sure. I think those two initiatives that we talked about in my prepared remarks, timing the TBI – we should expect to see some stuff second half of this year, probably close to the fourth quarter that new in-patient satellite, you’re probably looking at first quarter or maybe second quarter of next we see some end results. Both of those initiatives stood at over a million dollars plus to our bottom line at that hospital. Doesn’t get us fully out of the red, but make sure it helped us move in the right direction.

Jerry Doctrow - Stifel, Nicolaus & Company

And, in terms of the – I think as you mentioned, rate increase and anything else going on fundamentally there. All the – because the improvements – I know you’re renovating wings and that sort of stuff, where does that stand? Is that stuff all done at this point?

Bruce Mackey

For the most part, we still have each at hospital two wings that are vacant. We’re trying to figure out what best to do with them right now, that to lease them to third-parties for their use, open up an LTAC unit on our own. That’s definitely two opportunities we have. We also are looking at moving another one of our in-patient satellite units as well. That’s in discussions now. That will take some time. And, then obviously the long-term strategy as I’ve always said is the exercise with capacity moving up those third-party, less hospitals, we’ve got three. I’d love to get two more. That would really branch to LTAC and comfortable units. We beat the bushes a lot. Nothing is really kind of shaken lose so far yet to day, and we continue to try.

Jerry Doctrow - Stifel, Nicolaus & Company

Okay. And so, thinking about these moving towards breakeven say for early 2012, is that sort of the right takeaway from kind of your remarks?

Bruce Mackey

I think so.

Jerry Doctrow - Stifel, Nicolaus & Company

Yes, okay. And, there is a little bit more CapEx sales, I guess, to 10.8 million. Just trim line there in terms of maybe your CapEx investment what might go to the – just up a bit?

Bruce Mackey

No, Jerry. It’s really timing. Our full-year expectation on capital remains in the mid 50 million which is identical to last year. Again, it’s just timing.

Jerry Doctrow - Stifel, Nicolaus & Company

Okay, alright. Thanks. That’s all from me.

Operator

Thank you. And at this time, there are no further questions coming from the phone lines. I’ll turn it back over to Mr. Bruce Mackey for closing remarks.

Bruce Mackey

Great, thank you and thank you all for joining us in today’s call. We’ll be at the GMP Securities Conference in San Francisco in May and the Jefferies Healthcare Conference in New York City in June. We hope to see some of you there or at one of those more events. Thank you.

Operator

That does concludes our conference for today. Thank you for your participation and for using the AT&T Executive Teleconferencing Services. You may now disconnect.

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